Creating a loan product

Every field on the loan product form — terms, interest, grace periods, repayment strategy and approval.

Where

WhoAdministrators, credit managers

Permissionloan.loans.products.create

A loan product is the template every loan is created from. It sets the limits a loan officer can choose within, how interest is calculated, the order repayments are applied in, the charges, and how the product posts to the general ledger.

Tip

Set up funds, loan charges and the chart of accounts first — the product form asks for all three.

1. Details

Field	Required	What it means
Name	required	Full product name members and staff see, e.g. “Biashara Loan”.
Short name	required	A short code used in lists and reports, e.g. “BIA”.
Description	required	What the product is for and who qualifies.
Currency	required	Currency the loans are issued in.
Fund	required	Default funding source for loans of this product.
Active	required	Only active products can be chosen for new loans.

2. Principal and term

Field	Required	What it means
Minimum / default / maximum principal	required	Limits on the amount borrowed. Minimum must be below maximum, and the default must be within them.
Minimum / default / maximum loan term	required	Number of repayment periods allowed.
Repayment frequency	required	How many units between instalments — e.g. `1` with type months means monthly; `2` with weeks means fortnightly.
Repayment frequency type	required	Days, weeks or months.

3. Interest

Field	Required	What it means
Minimum / default / maximum interest rate	required	The rate range a loan officer can choose.
Interest rate type	required	Whether the rate is per month or per year.
Interest methodology	required	Flat — interest on the original principal for the whole term. Declining balance — interest only on what is still owed. See below.
Amortization method	required	Equal instalments — the same total payment every period. Equal principal — the same principal every period, so payments fall over time.

Flat or declining balance?

	Flat	Declining balance
Interest is charged on	The original principal, every period	The outstanding balance only
Total interest	Higher for the same headline rate	Lower — falls as the loan is repaid
Example: 10,000 at 2% a month for 6 months	1,200 interest	About 710 interest (equal instalments)
Typical use	Group and micro loans, simple to explain	SACCO, salary and larger business loans

Important

Many regulators require you to disclose the effective annual rate. A 2% flat monthly rate on a 6-month loan costs about the same as 3.5% a month on a declining balance — over 40% a year. See effective interest rate.

4. Grace periods

Field	Required	What it means
Grace on principal paid	required	Number of instalments at the start where no principal is due — interest only.
Grace on interest paid	required	Number of instalments where interest is due but not collected; it is spread over later instalments.
Grace on interest charged	required	Number of instalments where no interest is charged at all.

Use 0 for no grace. Grace periods suit agricultural loans where income only arrives at harvest.

5. Repayment order (transaction processing strategy)

Decides how each repayment is split when a member pays.

Strategy	Applies money to	Use when
Penalties, fees, interest, principal	Penalties first, principal last	Standard MFI practice — recovers income first
Principal, interest, penalties, fees	Principal first	Reducing risk fastest; some consumer-protection rules
Interest, principal, penalties, fees	Interest, then principal	Keeping penalties last to help members in arrears

6. Disbursement, signatures and approval

Field	Required	What it means
Auto disburse	required	If on, an approved loan is disbursed automatically; if off, a staff member disburses it.
Signature requirement	optional	None, before disbursement (the loan cannot be disbursed until the agreement is signed) or after disbursement.
Charges	optional	Loan charges attached to every loan of this product, plus overdue charges (penalties).
Credit checks	optional	Checks run on every application — see Credit checks and formulas.
Approval officers	optional	Users allowed to approve loans of this product. Use this to enforce maker-checker and approval limits.

7. Accounting

Choose the accounting rule, then map each GL account. See Product accounting for every mapping explained.

Rule	When income is recognised
None	No journal entries — not recommended for regulated institutions.
Cash	When the member actually pays.
Accrual (periodic)	As interest is earned each period, whether or not it is paid.
Accrual (upfront)	All interest is recognised when the loan is disbursed.

After saving

Changes to a product apply to new loans. Existing loans keep the terms they were created with.